In the securities markets, market mechanics and trading psychology create high costs to the disclosure of information required for any efficient search for a contra party for a large trade. By publicly revealing his intentions, a market participant assumes the risks of adverse price action.
In a co-pending application, U.S. patent application No. 09/870,849, “A Method for Directing and Executing Certified Trading Interests,” filed May 31, 2001 (the entire contents of which are incorporated herein by reference for all purposes), a system is described for using confidential market data to route information about new live, confidential orders specifically to likely contras, based on certified trading interest information such as the trades a possible target has recently executed. This system is particularly well-suited when data is naturally aggregated at a particular market center, as is the case for members of a stock market or an exchange, known as “sell-side” firms.
Sell-side firms typically represent a plurality of clients on the “buy-side”—the end buyers or sellers of the security. Each buy-side client normally works through multiple sell-side firms as the client is working its orders, so there is no central repository of buy-side trading data, short of the Depository Trust & Clearing Corporation (DTCC)—a holding company whose subsidiaries provide clearance, settlement, and custody of investment transactions in the U.S.
One known method for routing information about orders to buy-side clients is the use of Indications of Interest (IOIs) by brokers. AutEx, for example, offers a bulletin board for posting IOIs and supports targeting IOIs to specific groups of buy-side firms. One problem with this IOI system is that there is no incentive for brokers issuing IOIs to target them precisely to firms that have a genuine interest in the contra side of the order, since this is primarily an advertising mechanism for their firm to display activity in a particular security. It also offers no mechanism for targeting based on data pooled across multiple brokers. There is also no incentive for brokers to remove IOIs after they have been issued, even after the original order has been canceled or executed, because it is always in the broker's interest to receive a call about an IOI even if there is no longer an executable order on the opposite side. So recipients of IOIs generally attach little value to them and will avoid leaking information by calling up a broker about them.
Some Electronic Communications Networks (ECNs) let their users post IOIs about individual live executable orders, but said ECNs do enable routing based on aggregate trading information. For example, they do not anticipate a system that enables users to route IOIs based upon the potential targets' net trading position, counting a plurality of trades. They also do not anticipate a system that enables routing based upon information provided on an as-needed basis by multiple data providers that wish to keep their data within their own facilities, and protected behind an electronic firewall. They do not enable an auction server or matching engine to route IOIs through routing engines installed at said data providers that maintain the confidentially of said data providers' clients to said matching engine or auction server. Said ECNs' IOI systems also do not anticipate a system wherein the IOIs are automatically removed when the underlying order was filled or canceled, becoming in effect closer to a private quote and hence of greater interest to the recipient. These systems also do not anticipate that said live executable orders may be held in a separate matching engine or auction server wherein said orders are not exposed to the order flow through said ECN's matching book, or wherein said orders are not subject to losing execution priority to a small better-priced order on said ECN's matching book, in the practice known in the art as “penny jumping”, or wherein a recipient of the IOI may enter a large Immediate Or Cancel (IOC) order that can only be executed against the advertised order, leaving any residual size unfilled and without leaking information to other users of said ECN. Existing ECN-based IOI systems also do not anticipate providing their users the additional benefit of being informed when there was a contra in the security that satisfied the routing parameters and order attributes on said users' orders, to enable the users that enter said orders to know when an IOI was indeed routed.
LiquidNet has recently been launched to facilitate the discovery of natural counterparties to a trade through information contained in buy-side Order Management Systems. Although this approach offers the benefit of using buy-side trading information that resides behind the Institutions' firewalls, it does not anticipate a system that lets the order entry participant request that the order be routed only based upon certified trading interest information, whether said certification is based upon the reporting of trades for clearing purposes or the entering of a live electronically executable order in a matching book with parameters that ensure that it is reasonably likely to be executed based upon the rules of said matching book. Instead, LiquidNet users must trust the integrity of the data, which pertains to the same buy-side firm that stands to benefit from receiving information about orders. The temptation therefore exists for an ill-intentioned firm to put “fake” data in the system, such as an order that the firm does not presently intend to execute, for the purpose of attracting information about parties that may have a large order on the opposite side. Another important problem with the LiquidNet model is that it uses one firm's information to route information to another firm (an invitation to negotiate); this leaks confidential information from the Order Management System, and this is unacceptable to most large buy-side institutions. To cope with these problems LiquidNet uses a “country club” approach of limiting its subscriber list to a certain class of relatively tame buy-side firms, excluding for example most hedge funds and other potentially aggressive parties. Since this club consists of like-minded players who tend to be trading on the same type of information, there is less opportunity for differences in stock valuation and hence relatively few trading opportunities.